PACRA maintains Entity and Debt Instrument Ratings of Pak Electron, warns of downward revision

September 11, 2018: Pakistan Credit Rating Agency, on Monday September 10, maintained its Entity Ratings, and Debt Instrument Ratings (Sukuk II and Commercial Paper) for Pak Electron Limited (PAEL).

Entity Ratings were maintained at ‘A+’ for the Long Term and ‘A1’ for the Short Term, with a ‘Stable Outlook’ assigned to the firm. With respect to its debt instrument Sukuk II, a Long Term rating of ‘A+’ was maintained. In addition, the rating agency also maintained its Debt Instrument ratings for PAEL’s Commercial Paper at ‘A+’ for the Long Term and ‘A1+’ for the Short Term.

PACRA had previously assigned these ratings on January 10, 2018.

According to the rating agency, the assigned ratings reflect PEL's diversified revenue stream and strong presence in Appliances and Power products market.

“The Company, while aiming brand expansion, has continued to focus on enhancing actual production in the key revenue generating products and intends to introduce new products (TV and Washing Machine),” said PACRA.

“However, strong competition led to a decline in sales, in 1HCY18. The Company could not completely pass on the increased raw material costs, which squeezed its margin and impacted profitability. The Company's cash flows came under pressure and coupled with larger quantum of borrowings deteriorated the coverage ratio,” said the rating agency in its report.

Moreover, it also warned that PEL’s capital structure is characterized by intermediate leverage due to new financing obtained to support inclining business volumes. High working capital needs emanating from long inventory and receivable cycle expose the company to financial risk. 

As per PACRA, the ratings also take in to account the strong business dynamics in Appliances and Power segments.

“Any further deterioration in margins, in turn, profitability may lead to downward rating revision.”

However, the Company's ability to strengthen its business profile by improving volumetric sales remains critical. Meanwhile, close monitoring of working capital requirements and debt servicing capacity remain imperative. Maintaining strong coverages and managing financial risk prudently is crucial for the ratings, it added.